Friday, September 13, 2019

Austria's 100 year bond.

If you create a bond with a 2% coupon in a world where interest rates are 0.9%, you can bet that that bond is going to be very very volatile. 

Case in point - Austria's 100 year bond that matures in 2117.  (note: register for the economist and you can view a few articles for free).

My quick calculations show that this bond has a duration of about 56.  That's pretty high!  I'd be interested to know whether investors are buying this a straight bet on interest rates or whether they are using it as part of a portfolio.  You wouldn't need much of this bond to tilt the duration of your portfolio higher.

Here are my excel computations, with the predicted price change using duration alone (which is not terribly accurate in this case).  For bonus points - explain why this is the case...


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